GRP

Background

Gujarat Reclaim and Rubber Products Ltd. (GRRPL) produces reclaim rubber from scrap of whole tyres, tread peelings, natural rubber tubes, butyl tubes, moulded rubber products for different applications in both tyre and non-tyre rubber products.

Established in the year 1974, Gujarat Reclaim started production with a modest capacity of only 2400 MT. After years of steady growth, it has increased its capacity by many folds (40,000 MT in FY10), and has widened its geographical presence in India and abroad (supplies across 45 countries). GRRPL operates from three locations in India’s north-west (Ankleshwar, Panoli) and south-west (Solapur).

Gujarat Reclaim has acquired a 3.6 MW windmill in the last quarter of FY10 in Gujarat. For the power units generated by windmill, the company gets credit in the electricity bill of its Panoli plant in Gujarat.


Main Products/Segments

Today Gujarat Reclaim has emerged as the largest manufacturer of reclaim rubber in the country and among the top 3, globally. Of total sales of Rs.140.67 Cr for FY10, domestic sales comprise Rs. 61 Cr (43.36%) and Exports comprise Rs.79.67 Cr (56.64%).


Main Markets/Customers

Major user industries are Automotive tyres & tubes, belts, automotive & industrial hoses, adhesives & sealants, civil construction applications.

Overall growth projected by the Rubber Board for the reclaim rubber industry for the next 4-5 years is at 8-10% year-on-year. If prices of virgin rubbers escalate at the current rates, this growth could easily be higher. Reclaim rubber is preferred for industrial use to the traditional virgin polymer because of its several advantages. Reclaim rubber is readily available in the country, is energy saving & the price of reclaim rubber today is around 25-30% of the polymer prices.

Exports contributed 57% of Sales in FY10.


Bullish Viewpoints

  • Good Industry prospects – Reclaim rubber is an eco friendly industry and with the rising prices of natural rubber, demand for reclaim rubber should increase going forward.
  • Consistent Margins and Profitability – Gujarat Reclaim has a neat track record of consistent growth and profitability. 5 Yr CAGR has been about 24% and 10 Yr CAGR has been at about 28%. Operating Profit Margins have generally been in the range of 16-19% and Net Profit Margins in the range of 9-11%.
  • Good Dividend record – Gujarat Reclaim is shareholder friendly and has a track record of continuously increasing dividends. 5yr DPS CAGR is 19% wheras 3yr DPS CAGR is almost 22%. Dividend payout ratio currently is about 19%.
  • High Returns – The business model is strong and the co generates high ROCEs. While it used to enjoy 40%+ returns, the last 2 years has seen returns 30%+ which is pretty good given the prevailing economic scenario.
  • Steady Growth – The company maintains that the new challenge before GRRPL is to maintain annual growth in excess of 30% and at the same time not waver from its path of building and consolidating trust among its growing number of stakeholders.
  • Recent Financial performance – For 9m FY11 Gujarat Reclaim has done Net Sales of 139 Cr (104 Cr 9m FY10) and PAT of 13.69 Cr (10.83 Cr 9m FY10). The company looks set to register a healthy 25-30% growth in FY11
  • Decent Valuations – at 915 CMP, the stock is available at ~7x FY11 EPS and 1.9x BV

Bearish Viewpoints

  • Capacity constraints – For the last 3 years installed capacity of reclaim rubber is stagnant at 41000 MT. In FY11, the company reportedly has expanded capacity at its Panoli plant by 6000 MT and a new plant is being commissioned at Solapur.
  • Expanded capacity utilisation – Increased capacity that is reportedly coming onstream by FY12 may lead to underutilisation and impact near-term profitability.
  • Raw material prices – Raw material/Sales has been steadily going up over the years. From roughly 40% in FY06 this is up over 45% in FY10. The rise has however been gradual and generally been offset by improvements in sales general & administration (SG&A) costs, power & fuel costs, etc. without really affecting operating margins.

Barriers to entry

  • In FY10 the installed capacity of reclaim rubber in India is estimated to be 150,000 tonnes, of which nearly 60% is manufactured by small scale industrial units, many of them maybe having obsolete machinery and processes.
  • Gujarat reclaim with an installed capacity of 41000 MT is the largest manufacturer and exporter of reclaim rubber in the country. Exports contributed 57% of Sales in FY10
  • GRRPL products are approved at 7 of the top 12 tyre companies in the world and 4 of the top 10 non-tyre rubber makers in India, the United States, Australia, France, Japan, Korea, Spain, and United Kingdom, among others.
  • One of the key strengths of GRRPL is that it has developed a wide network for raw material procurement and built an extensive chain of raw material suppliers. They are supported in procuring waste tyres from various state transport companies and other local collection sources. The suppliers act as agents of the company in reaching out across cities they operate in, to district and village level centres gathering the 45,000 tones of materials required at GRRPL factories.

Interesting Viewpoints

  • Gujarat Reclaim is focusing on sales of synthetic rubber reclaims which command higher value and realisation compared with the Natural rubber based reclaims. GRRPL has been a pioneer in the manufacture of reclaimed rubber from synthetic rubbers such as butyl, EPDM, nitride, etc. With increasing emphasis in the use of virgin synthetic rubbers for rubber compounds the world over, the future holds immense potential for the consumption of synthetic reclaim rubber, mainly in the non-tyre rubber goods manufacturing. The synthetic rubber reclaims business has grown significantly over the last few years and contributes approximately 45% of GRRPL’s total revenues.
  • Depending on the tyre type, reclaim rubber in a tyre can be as low as 0.5% to total polymer (in case of high performance PCRs) to as high as 12% to total polymer (in case of OTRs) and a further high of 35% (in case of cycle tyres). The Indian tyre industry as a whole consumes 4% reclaim rubber of total polymer. But individually, certain companies are also experimenting at levels of 6-7%.
  • The generation of scrap tyres and other waste tyres is a global phenomenon. Whichever country or region that has sufficient volumes of such scrap generation has an opportunity to have a reclaim industry. However, the consumption and market for reclaim rubber will depend upon where the production of reclaim rubber is. The global reclaim rubber industry has grown from being 2% of total polymer consumption in early part of last decade to close to 5% currently. China leads the way with the largest base for reclaim rubber manufacturing and also the highest consumption as proportion to virgin polymers.

Disclosure(s)

Donald Francis: No Holdings in the Company;


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